Monthly Archives: May 2013

When it comes to household finances, Canadians may be poorer than they know. That’s the blunt assessment from a research report released today by the Certified General Accountants Association of Canada (CGA-Canada).

The report underscores the need for Canadians to get a better grasp of their financial situation.

“While many Canadians appear satisfied with how much wealth they have, they can’t necessarily put a dollar value on it,” says Anthony Ariganello, president and CEO of CGA-Canada. “They therefore may overlook the need to make adjustments to their savings, borrowing and investing behaviours.”

The report reveals a number of troublesome findings:

29 per cent of households say they don’t have any wealth and only three in ten Canadians think that wealth accumulation is very important.

42 per cent of households are satisfied with the wealth they have, yet over half (51 per cent) say they last calculated their household wealth a year or more ago, never, or could not recall.

Of Canadians who are building wealth, an overwhelming majority (80 per cent) say they may consume at least part of it in the next three years. When additional funds become available, Canadians may be more likely to use the funds for consumption rather than wealth accumulation.

“Many Canadians are missing a golden opportunity to build some financial security for themselves during this time of low-cost borrowing,” says Rock Lefebvre, vice president of Research and Standards at CGA-Canada andco-author of the report. “What people may not fully appreciate is just because you can take up to 25 years to pay off your home, doesn’t mean you should or need to. In some ways, it’s similar to making only minimum payments on your credit card.”

Note: These are some of the findings of a public opinion survey commissioned by CGA-Canada which examined the attitudes of Canadian households to wealth accumulation. The survey was administered by Ipsos Reid from September 14 to 21, 2012. The interview questionnaire was designed by CGA-Canada in collaboration with senior staff of Ipsos Reid andpre-tested. The sampling methodology was designed to accommodate an online interview process, with respondents making up a representative sample of Canadian adults aged 25 years and over. The survey sample was drawn using Ipsos Reid’s online panel; a total of 1,805 online interviews were conducted with households living in the 10 Canadian provinces. With this sample size, sampling error of plus or minus 2.31% is produced at a 95% confidence level (19 times in 20).

CGA-Canada

New York Senator Kirsten Gillibrand, a Democrat, is expected to unveil a bill this week that would force the Department of Education to automatically refinance federal student loans with high interest rates. Government student loans with rates higher than 4% would be fixed at the 4% rate.The Huffington Postsays nine out of 10 government backed loans would be affected.

Student debt tripled to $1.1 trillion between 2004 and 2012, according to the Consumer Financial Protection Bureau. It now accounts for 8.8% of all consumer debt—up more than 3% since 2004. That’s second only to what consumers owe on home mortgages.

“You’re trying to buy a house, get a car,” said Irwin on Jansing & Co Monday. “If you have that overhang of debt, it’s much harder to do that. The challenge for these graduates coming out with these huge burdens of debt is can they be integrated into the U.S. economy and really become fully fledged members of society when they start out with these tens of thousands of dollars in debt overhang.”

Sixty-five percent of graduates take out loans with the average debt at $26,600. The burden of repaying these loans is causing graduates to delay buying a house or a car or even starting a family. Their decision to put off spending may be putting a damper on profits of local businesses and the larger economy as a whole.

Irwin said he’s not sure the high interest rates on federal student loans is necessarily the problem. He said that even though the federal government has subsidized student loans, that hasn’t stopped college costs from skyrocketing. Even with a lower interest rate, a higher tuition will still yield a large loan debt for students.

“The trick is to find a way to reduce college costs not just in terms of interest rates but also in terms of the actual tuition that students are facing so they don’t end up worse off even as you lower interest rates,” said Irwin.

Interest in student loan issues comes as the Department of Education is projected to generate $51 billion in profits this year from student lending. That’s more than the 2012 earnings of the nation’s most profitable company Exxon Mobil.

The Department of Education disagreed with the profit comparison, saying annual profit turning by corporations is in no way comparable to projections of student loan collections over a 40-year loan.

Irwin suggested some of the DOE’s profits should go towards educating students about how to navigate the financial burdens of higher education. Otherwise, Irwin said the current college loan system “definitely sets up something that almost resembles indentured servitude.”

For the second straight quarter, the percentage of Americans with at least one account in the third party debt collection system hit an all-time high in the first three months of 2013. Close to 15 percent of consumers have an account being worked by debt collectors.

The Federal Reserve Bank of New York (FRBNY) Tuesday published its Quarterly Report on Household Debt and Credit for the First Quarter of 2013. The FRBNY noted that 14.64 percent of Americans had at least one account on their credit reports furnished by third party debt collection agencies, and all-time high. The figure was up slightly from the fourth quarter of 2012,which set a then-record 14.63 percent.

The average balance of those accounts in collection, however, is dropping rapidly. In the first quarter, the average balance of accounts in collection was $1,433, down from $1,499 in the previous quarter and well below the peak average of $1,550 in the second quarter of 2012.

The Quarterly Report on Household Debt and Credit is based on data from the New York Fed’s Consumer Credit Panel, a nationally representative random sample drawn from Equifax credit report data. In the notes for the report, the FRBNY says that “only a small proportion of collections are related to credit accounts with the majority of collection actions being associated with medical bills and utility bills.”

In Q1 2013 total household indebtedness fell to $11.23 trillion, one percent lower than the previous quarter and considerably below the peak of $12.68 trillion in Q3 2008.

“After a temporary deceleration in the previous quarter, the data suggest that household deleveraging has resumed its previous trajectory,” said Wilbert van der Klaauw, senior vice president and economist at the New York Fed. “We’ll look to see if this pace of debt reduction and delinquency improvements will persist in upcoming quarters.”

Americans cut back on using their credit cards in March, suggesting many were reluctant to take on high-interest debt to make purchases.

Consumer borrowing rose just $8 billion in March from February to a seasonally adjusted $2.81 trillion, the Federal Reserve said Tuesday. It was the smallest increase in eight months.

The gain was driven entirely by more loans to attend school and buy cars. The category that measures those loans increased $9.7 billion to $19.6 trillion.

A measure of credit card debt fell $1.7 billion to $846 billion. That’s 17.2% below the peak of $1.022 trillion set in July 2008.

Since the recession, consumers have been more cautious about using credit cards. Economists believe consumers will stay cautious this year, in part because of an increase in Social Security taxes that has reduced tax-home pay for most Americans.

Cooper Howes, an economist at Barclays, said consumers have been trying to get better control of their debts since the recession hit and he predicted this trend will continue.

While the Fed does not release a breakdown between auto and student loans, Howes said his analysis of the Fed data indicates that almost 80% of the March increase reflected student loans. That would continue a pattern seen in recent years: Americans who lost jobs or recent graduates who can’t find work have returned to school and are taking out loans to pay for their education.

According to quarterly data compiled by the Federal Reserve Bank of New York, student loan debt has been the biggest driver of borrowing since the recession ended in June 2009. Student loans reached $966 billion in last year’s fourth quarter. That’s up from $675 billion in the second quarter of 2009, when the Great Recession was ending.

Consumers increased their spending from January through March at the fastest pace in more than two years. However, they had to trim the pace of their savings to finance the faster spending. Their after-tax income dropped by the largest amount since the final three months of the recession in 2009. Part of the drop in after-tax income reflected the increase in Social Security taxes that took effect on Jan. 1.

A person earning $50,000 a year will have about $1,000 less to spend this year. A household with two highly paid workers will have up to $4,500 less.

Solid hiring could offset some of the drag from the tax increase. The economy added 165,000 jobs in April and hiring in the two previous months was better than previously reported. That helped drive the unemployment rate down to a four-year low of 7.5 percent in April.